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Unconventional Oil Production Stuck in a Rock and a Hard Place


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Oil Production
Stuck in a Rock and a Hard Place

By Kristie M. Engemann and Michael T. Owyang

                                                            Oil sands are loaded onto trucks at the suncor mine near Fort McMurray, alberta, on oct. 23.   Mark ralston/aFP/Get t y IMaGes

H     ighly variable oil prices and increasing
      world demand for oil have led produc-
ers to look for alternative sources of trans-
                                                  common method used in Canada. In this
                                                  process, producers drill two horizontal
                                                  wells; the first is injected with steam to
                                                                                                                 Conversion Process could potentially cre-
                                                                                                                 ate stable oil directly and, thus, bypass the
                                                                                                                 upgrading step. In this process, the oil shale
portation fuel. Two popular alternatives are      heat the bitumen, and the other pumps the                      is electrically heated for two to three years
oil sands (aka tar sands) and oil shale. How-     heated oil to the surface. In Venezuela, the                   until it reaches about 700 degrees F, and the
ever, obtaining usable oil from oil sands or      oil is warmer and less viscous, and, there-                    released liquid is collected. The company
oil shale is more capital-intensive and more      fore, steam is not necessary. Producers com-                   uses a “freeze wall” around the perimeter
expensive than obtaining oil from conven-         monly drill multiple horizontal wells and                      to keep out groundwater and to keep in the
tional reserves. At what price of oil do these    use pumps to send the oil to the surface. The                  heated products. So far, Shell has success-
alternatives become cost-effective?               oil obtained by these underground methods                      fully tested its process on only a small scale.5
                                                  is also sent to an upgrading facility.3
Oil Sands

   Oil sands are a mixture of sand, water,        Oil Shale                                                      High Cost and Other Issues

clay and heavy, viscous oil called bitumen.          Oil shale is sedimentary rock that con-                        Because of the extra steps and capital
The largest known deposits of oil sands are       tains organic matter—called kerogen—and                        needed to produce a usable product, the cost
in Alberta, Canada, and the Orinoco Oil           mineral matter. Kerogen is not actually oil,                   of producing a barrel of oil from oil sands
Belt in Venezuela. As of 2005, the amount of      but it releases a substance similar to oil when                and oil shale is higher than from crude oil
oil in all oil sands deposits was estimated to    heated. An estimated 2.8 trillion barrels of                   reserves. Therefore, the unconventional
be nearly 5.8 trillion barrels (about 2.4 tril-   oil existed in known oil shale deposits at the                 oil requires a higher price per barrel to be
lion barrels located in each of Canada and        end of 2005, although not all of the kerogen                   cost-effective. Existing Canadian oil sands
Venezuela), with about 0.3 trillion barrels       is recoverable. Seventy-four percent of the                    operations could continue even if the price
estimated to be recoverable.1 For comparison,     known deposits are in the United States,                       of oil is less than $50 per barrel, according
an estimated 1.2 trillion barrels of conven-      primarily the Green River Formation in                         to a recent report. But for the Canadian oil
tional crude oil are recoverable.2                Wyoming, Utah and Colorado, which is the                       sands industry to grow, oil must be at least
   The process to obtain usable oil from oil      largest deposit in the world.4                                 $70 per barrel to make production economi-
sands is more complex than drilling the oil          As with oil sands, obtaining usable oil                     cally feasible.6
from the ground. For reserves close to the        from oil shale is not simple. For more-                           A 2005 study examined the possible
surface (e.g., about 20 percent of Canada’s       accessible deposits, the oil shale can be                      development of an oil shale industry in the
total reserves), the oil sands are extracted      mined by either surface or underground                         United States. For a new operation using
and transported to another location, where        methods. The mined oil shale then under-                       the mining and surface retorting method, a
the bitumen is separated from the rest of the     goes a process called surface retorting, in                    barrel of oil must cost at least $70 to $95 (in
matter using a hot water process. Because         which it is crushed and heated to about                        2005 dollars) for the business to be economi-
most refineries are not capable of using          1,000 degrees F, releasing the oil-like liquid.                cally feasible.7 As shown in the chart, the
bitumen directly, the bitumen then goes           Because this “oil” is unstable, it goes to an                  real price of West Texas Intermediate crude
to an upgrading facility, where it is turned      upgrading facility, where it is turned into a                  oil has not regularly sustained a price of $70
into a product that refineries can use (such      stable oil before being sent to refineries.                    over the past 10 years. Prices must consis-
as synthetic crude oil). For deposits more           For less-accessible deposits, the oil shale                 tently remain greater than the cost-effective
than 250 feet below the surface, the bit
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